Are Red-Hot Semiconductor Stocks Top Heavy?

Semiconductor stocks have rallied significantly higher over the past two months. Advances in artificial intelligence, autonomous driving and data centers have been key revenue drivers as tech companies continue to invest in the latest technologies. Micron Technology, Inc. (MU) and Nvidia Corporation (NVDA) have been the two most popular names, but many traders have turned to exchange-traded funds (ETFs) like the Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL​).

The ETF seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), of the performance of the PHLX Semiconductor Sector Index, according to the fund's sponsor. The index is up 17.6 percent in the period while the ETF has gained more than 60% since Sept. 7.

On Nov. 3, Bloomberg reported that Broadcom Limited (AVGO​) is considering a $100 billion – or $70 per share – cash and stock bid for Qualcomm Incorporated (QCOM​), citing people familiar with the matter. The rumors sent Qualcomm shares up as much as 19% on Friday, while Broadcom shares rose about 5.5% on the news. Representatives for both companies declined to comment, but the news was certainly a boost for the sector late in the week. (See also: Opinion: Investors Put Their Chips on Broadcom Mega-Deal.)

From a technical standpoint, the Direxion Daily Semiconductor Bull 3X Shares ETF reached fresh highs on Friday just below R1 resistance at $159.90. The relative strength index (RSI) remains extremely overbought at 81.43, but the moving average convergence divergence (MACD) remains in a bullish uptrend dating back to late September. These dynamics suggest that traders should remain cautiously bullish on the name.

Traders should watch for a breakout from R1 resistance to test trendline resistance at $165.00 or R2 resistance at $171.85 on the upside. If the ETF moves lower, traders should watch for some consolidation at around $150.00 or a move to pivot point support at $137.40 on the downside. The lofty RSI reading suggests that near-term consolidation is the most likely scenario, which means traders should remain cautious in long positions. (For more, see: The Industry Handbook: The Semiconductor Industry.)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.